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Mixed economic signs ahead of first interest rate decision for the year

The Reserve Bank board will hold its first meeting of the year this week and it's being confronted with conflicting economic signals about whether it should move on interest rates. Manufacturing output remains sluggish and inflation has moderated, but property prices are continuing to rise.

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ELEANOR HALL: The Reserve Bank board will hold its first meeting of the year this week and it's being confronted with conflicting economic signals about whether it should move on interest rates.

Manufacturing output remains sluggish and inflation has moderated, but property prices are continuing to rise.

Joining us now is business reporter Pat McGrath. Pat, just how confusing is the message from this economic data out today?

PAT MCGRATH: Well, Eleanor, it has been a deluge of information and data today, and it does give quite a confusing and differing picture of the economy, but it's fair to say that it is mostly negative. So perhaps it is best to start with the official figures from the Bureau of Statistics for the construction sector.

So, the number of building approvals fell by almost 3 per cent in December, and so that's about 3.4 per cent for houses; so within those figures, private construction for houses is particularly bad.

So the pickup in housing construction that the RBA has been looking for to balance out the overall decline in mining appears to be experiencing some difficulties there. So the result is much bigger than economists have been expecting, and obviously don't bode well for the future in that particular sector.

And that's been met by, on the other hand, another strong rise in house prices. So the latest RP data Rismark figures show that across the capital cities in Australia, house prices increased by 1.2 per cent last month, and once again Melbourne and Sydney appear to be driving those increases.

So in Melbourne prices increased by 3.2 per cent in January, so that's a huge jump, and made up most of the quarterly jump that Melbourne saw in terms of its house price increases.

There's been some weakness in Perth, where prices dropped slightly for the month, but they remain ahead overall for the quarter, and also for the year.

Now, there's also been some manufacturing figures out today, and that's an area that's obviously on people's minds, with the recent debate around Government funding for SPC Ardmona. And the Australian Industry Group's purchasing managers index shows that output from the sector is continuing to decline; it's a negative reading, it's below 50 points again, which is the reading that separates contracting from expansion.

But Innes Willox from the Ai Group, he expects the falling Australian dollar to begin to help the sector this year if it does continue falling.

INNES WILLOX: The drops are very positive and very welcome; it will just take some time to come through.

What's really impacting on the sector is, although there's been some increases around employment, which is very positive, and also in new orders, so they're very positive signals, there are still concerns around confidence - both consumer confidence and business confidence more generally - and that impacts on manufacturing in Australia.

ELEANOR HALL: That's Innes Willox from the Australian Industry Group speaking there. Pat, there have also been figures on job advertisements this morning. Do they back up that sentiment from the manufacturing sector?

PAT MCGRATH: It does appear to. And these are the latest job ads numbers, the monthly figures, and they show that newspaper and internet job ads have fallen by a third of 1 per cent last month - so that means that the number of jobs advertised each week is now 3 per cent lower than six months ago - although the decline, ANZ says, appears to be slowing somewhat.

So, even though we don't get January's official unemployment figures from the ABS until next week, this is obviously causing some concern about the jobless rate, when it is released, heading up above 5.8 per cent.

ELEANOR HALL: Now of course the Reserve Bank board is due to meet tomorrow to set the official cash rate. Care to give us a bit of a preview on how these figures might affect that decision?

PAT MCGRATH: I might leave that to the economists, but all these factors are obviously playing into the Reserve Bank board's discussions tomorrow. So the RBA is no doubt finding comfort in the fact that the dollar has declined steadily since late last year, and that's something that a number of officials at the RBA, including Glenn Stevens, have been hoping for.

And it's also keeping an eye on inflation, which, according to the latest official figures, is at an annual pace of around 2.7 per cent. So that's towards the top of the RBA's comfort zone. So there's some expectation that that that higher rate of inflation could provoke an interest rate rise sooner than later.

Now, this morning we've been greeted with some nonofficial figures from, consumer prices from TD Securities and the Melbourne Institute, and it shows that prices increased by just a tenth of 1 per cent in January after that strong rise in December.

So Annette Beacher, who is the head of Asia-Pacific analysis at TD Securities, expects the RBA to keep the cash rate on hold tomorrow, but she thinks the next movement will be a rise.

ANNETTE BEACHER: We are seeing considerable traction of lower interest rates into the appetite for credit and house price inflation, so I think the leading indicators are firmly telling us that growth will be back to trend, GDP growth will be back to trend of 3 per cent. So, I'm sort of fairly comfortable with the fact that the next move is up, and will be in the final months of this year.